For What It’s Worth — Buffalo Springfield
It’s time we stop, hey, what’s that sound
Everybody look what’s going down
House prices: house prices are going down. That sound is the weeping and gnashing of teeth of speculators and homedebtors everywhere.
A thousand people in the street
Singing songs and carrying signs
“Bail me out” printed on every sign. Banks, automakers, insurance companies, and of course, overextended homeowners.
Paranoia strikes deep
Into your life it will creep
It starts when you’re always afraid
Is market psychology starting to change? The next stage after denial is fear. Has the severity of the recession changed people’s opinions?
The Psychology of the Bubble
Actually, from what I have observed, the market psychology is different at different stratas of the market. The low end is already approaching capitulation. There is no more hope for people holding on at the low end. The middle of the market is starting to feel fear. Prices are starting to significantly weaken, and those priced near the median are starting to show larger discounts. The high end of the market is still in denial.
The high end has the least reason to hope. Their denial is rooted in the continuing activity of knife catchers, but jumbo rates are rising, and the knife catchers are nearing exhaustion. The collapse in both pricing and market psychology is working its way up the food chain.
{book}
Today’s featured property is a low-end condo approaching its 2003 purchase price. I featured a similar property over a year ago. 93 Tarocco was asking $389,000, and it was being touted as an “investment property”. The investor must not be very happy right now…
Asking Price: $274,900
Income Requirement: $68,725
Downpayment Needed: $54,980
Monthly Equity Burn: $2,290
Purchase Price: $235,000
Purchase Date: 2/13/2003
Address: 33 Tarocco, Irvine, CA 92618
| Beds: | 2 |
| Baths: | 2 |
| Sq. Ft.: | 995 |
| $/Sq. Ft.: | $276 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Cape Cod |
| Year Built: | 1983 |
| Stories: | 1 |
| Floor: | 2 |
| Area: | Orangetree |
| County: | Orange |
| MLS#: | S556458 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours)
|
|
Beautiful End Unit; very Private, Light & Bright; Great Location
Walking Distance to Irvine Valley College; nearby UCI, Irvine Spectrum,
Shopping Mall, Business area and major freeways. Custom Paint, New
flooring, Inside Laundry.
- This property was purchased on 2/13/2003 for $235,000. The owner used a $188,000 first mortgage, a $47,000 second mortgage, and a $0 downpayment.
- On 11/4/2003 he refinanced for $245,000.
- On 9/27/2004 he refinanced for $275,000 using an Option ARM with a 3.66% teaser rate.
- On 4/25/2006 he opened a HELOC for $72,500.
- Total property debt is $347,500
- Total mortgage equity withdrawal is $112,500 — a hard working little condo…
Washington Mutual took back the property on 11/13/2008 for $289,800 which is likely the outstanding balance on the Option ARM. If this is accurate, Washington Mutual actually has loans totalling $362,300 on this property. If it sells for its asking price, and if a 6% commission is paid, the total loss to Washington Mutual will be $104,270. I thought Washington Mutual was supposed to be a conservative lender…
What do you think this would rent for? $1,750? How much rent would be required for an owner-occupant to break even?
This is still 10% or more above owner-occupant breakeven. It is 10% above based on the calculations presented here, but since an owner-occupant who is at this income level isn’t going to see as large a tax break as I am showing here, it probably needs to drop another 20% to reach rental parity. Of course, the whole discussion of owner-occupant breakeven assumes there is someone willing to live in this place long term. In all likelihood, this will be bought by an investor looking for positive cashflow. When I wrote the post on 93 Tarocco, I quipped that the price would need to fall to $180,000 to find a rational cashflow investor. I think that price is about right for this one as well.
Sponsored Posts
This brings me to another subject I want to discuss with the IHB community. To date we have been a completely non-commercial website. We make a few bucks with ads, and I have made a few bucks selling books, but we have never been focused on monetizing the IHB.
We have been approached by a realtor that would like us to profile properties outside of Irvine and provide our unbiased opinion of the investment potential. If we decide to do this, the posts would only appear on the weekend, and they would only be properties that are at rental parity or below using the same analysis pictured above. Our motivation for doing this is twofold: one, it would be nice to make a few extra dollars, particularly in this economy, and two, I would like to show that we are not permabears. There is a price point where real estate investment makes sense, and when we find properties selling at these price levels, I will point out that they might be good deals. In fact, the only announcement we will make about the bottom of the market will be a slow transition from mocking overpriced properties to featuring what appear to be good deals. Hopefully, we will start to do this for Irvine properties in the coming years. Until then, sponsored posts on properties outside of Irvine are as bullish as we will get. We will probably profile a couple of these properties early next year, and if the response is not negative, we will continue to do so.
P.S. Check out my interview on South OC Real Estate Tracker.
{book}
There’s something happening here
What it is ain’t exactly clear
There’s a man with a gun over there
Telling me I got to beware
I think it’s time we stop, children, what’s that sound
Everybody look what’s going down
There’s battle lines being drawn
Nobody’s right if everybody’s wrong
Young people speaking their minds
Getting so much resistance from behind
I think it’s time we stop, hey, what’s that sound
Everybody look what’s going down
What a field-day for the heat
A thousand people in the street
Singing songs and carrying signs
Mostly say, hooray for our side
It’s time we stop, hey, what’s that sound
Everybody look what’s going down
Paranoia strikes deep
Into your life it will creep
It starts when you’re always afraid
You step out of line, the man come and take you away
We better stop, hey, what’s that sound
Everybody look what’s going down
Stop, hey, what’s that sound
Everybody look what’s going down
Stop, now, what’s that sound
Everybody look what’s going down
Stop, children, what’s that sound
Everybody look what’s going down
For What It’s Worth — Buffalo Springfield
As long as the sponsored posts are identified as such, I think it’s a fine idea. After all, if you can’t monetize your site, what’s the point?
Yes, we would clearly identify each post as a sponsored post.
It is funny that we at the IHB are so concerned about monetization. Zovall started this site as a public service, and I have always tried to give freely to the IHB community. There is a purity of purpose that none of us want to lose. I think we all recognize that if we try to become commercial, we will lose what makes the IHB special.
IR,
I like the idea of profiling properties outside of Irvine; you deserve some financial reward for your service. I would especially like seeing properties in the South Huntington Beach area, after living/renting in Irvine for 5 of the last 8 years we’ve decided it won’t be where we buy. I’ve worked in Irvine for the last 17 years and it’s not as nice as it once was.
“The high end of the market is still in denial.”
Regarding your chart today, where do you think the mid range is? Some colleagues of mine are seriously considering 9 Pinebrook in Irvine, they seen a flattening of prices on Zillow and of course figure this is bottom.
IR,
Just clearly identify the sponsored posts and I’m all for it. You’ve put a lot of time, hard work and diligence into this site. As long as you are upfront about what you do, you won’t lose any credibility. You’ve earned our trust.
Before I saw your analysis, I thought – “you could probably get 1,750 for this place, which should be a net positive”.
Then I saw the association fees…$370!!
WTF!?! Probalby because this is a 1983 condo and there needs to be some capital improvements, but wow!
I am really glad I never bought the “starter” condo and straight for an old bungalow as a starter. $370 just about kills any cost/benefit analysis on this one.
I rented in this complex until a few months ago and was paying $1,775/mo. And that was low compared to many neighbors. These are actually really nice and it’s kept up very well. They put on new roofs, new parking lot, new fences and revamped all the landscaping just in the five years I rented there.
The complex boarders IVC, lots of open space, no traffic. Great place for $1,775/mo. Wish I was still living there but changed jobs. At $2,000 per month to own, I’d do it but not if I had to plop $54,000 (which I don’t have) as a down payment.
I disagree that $1775 is FMV for this condo. Perhaps a year or two ago, but not today. Rents are falling, I know mine did.
I just leased an equivalent apartment, same sq ft. for $375 less plus a free month not more than two blocks away in a nice area. Since this place has an extra bath its worth maybe $75/mo more because more people are willing to rent if they get their own bath.
Someone would jump on this place for $1475-$1500 max assuming things don’t deteriorate much more.
If it was next door to UCI it could fetch more, but IVC is just a community college. More than half of the people who go to IVC go at night. The majority that go during the day are younger students living at home.
“I just leased an equivalent apartment”
meant to say
“I just leased an equivalent apartment as the feature property”
I would be fine with this idea IR. A lot of people on this blog are looking at other cities and besides, you more than deserve the extra income.
Okay, this description was just plain lazy. C’mon, realtors: either follow proper capitalization rules or capitalize every blasted word. This just looks like something written with a cell phone.
Sounds like a great idea IR! You deserve it! Writing blogs daily takes much time and research. You should have some compensation. Also, it would be nice to actually see properties that would cashflow positive. I wonder how long it will take to see more of that in Irvine!
I think it would be a great idea to apply the analytics on this site to other markets and would be valuable.
as a reader who mostly lurks, I think you deserve some money for all the time and analysis you’ve put in…and I’ve actually been curious to see your skills applied to an area other than the OC. seems like a fine idea.
Showing properties outside the area would be good. Are we talking about OC/Riverside properties? I would assume so or there’s no likely target market for the Realtor to sponsor.
Property taxes are overstated on your calc. Monthly tax burden with special assessments, which are quite low due to the age of the unit, would be around $235 per month at list price. That’s $110 lower per month than the calculation depicts.
I am assuming that you left off taxation on the lost income from down payment also so that line item is overstated as well. For an owner occupant, a tax-effected rate of 3% would probably be more appropriate, so the forgone income on down payment is around $140 instead. This overstates the monthly cost by around $90.
So instead of a cost of $2007 per month it is probably more like $1807. If it costs less than the $229 per month you have to maintain the unit, it would likely be below rental parity for the owner-occupant.
Do you really think also $3K per year for a unit such as this is appropriate for maintenance? On these apartment style units the roofing and exterior paint are covered by association typically. There is no landscape to maintain. The only material things to maintain are the flooring, appliances and AC/heater. Can someone really spend the equivalent of $3K per year on those things?
Those are all good points. I would note that the tax savings is probably also exaggerated by $200 per month given the income level of an owner occupant.
The maintenance costs would probably be lower for an owner occupant because they would take care of the place. A landlord would be wise to assume they will need to replace carpets and repair damages when a renter leaves.
I don’t know if there are any Mello Roos still applicable to this property, so the special assessments might be either too high or too low.
As posted above, I rented there and knew the owner. No Mello Roos, association covers EVERYTHING including insurance (and earthquake insurance). When we moved in, he threw in some paint and that was it. The place had (fake) hardwood floors and granite counters, so there was nothing else to do.
BTW, we had some termites and the association even came in and took care of that. I think they do everything. If I still lived in the area, I’d buy it (or I’d buy my the downstairs unit I lived in w/ a 500sq patio) if I could work a deal for 10% off the price and only 10% down. That gets real close to rental parity.
Well I look at this property another way what will it appreciate to? It’s already pretty old if it has no mello roos. So all you are doing is really paying off a loan and your money is not earning anything. And the older a property gets less value as it ages.
This is one area many may have not looked at appreciation is lost now for quit sometime because of the age of some of these places. Sure it’s nice to own something but if you cannot make it better (fixing it up and getting that money back ) than it’s not worth buying from my investment point of view. Take the money and buy stocks (the right ones of course).
Or buy yourself a old home fix it up or tear it down. These old townhouses are worth much less in resale but for rental usage you can take off depreciation and that is about the only reason to own this or any old property. JMO–
Does anyone seriously think the foreclosure problems are behind us or that the problem is overstated?
Forecast: 8 Million Homes Could Foreclose in Coming Years
http://www.housingwire.com/2008/12/10/forecast-8-million-homes-to-foreclose-in-coming-years/
“Does anyone seriously think the foreclosure problems are behind us or that the problem is overstated?”
No chance, either here or elsewhere. Here is a notable story from Denver:
http://www.rockymountainnews.com/news/2008/dec/10/november-home-sales-in-metro-area-worst-on/
Another one. They’re “surprised.?” Really?
http://www.reuters.com/article/domesticNews/idUSN0847256620081208
I actually like the idea of seeing some properties profiled that are at rental parity or lower. As someone who is currently renting and would like to buy when it makes sense, I value the exercise of running the numbers. While it’s entertaining to see the extreme disconnect it is very helpful to see examples where it does make sense.
My two cents – whether it’s sponsored or not I’m looking forward to seeing the pro-purchase posts. If you can make some money off of them then more power to you. You’ve consistently been open and honest with us and the integrity with which you and Zovall have managed this blog to date speaks well for you both.
Hey IR,
Thank you for inviting our opinions about the sponsorship opportunity. I definitely support you on this one. Irvinehousingblog has come a long way and opportunities like these will only embellish the rational view points promoted by this blog; it is then likely that more people will shed denial and face up to reality.
Regards,
PH
IR,
As a long time silent lurker, I’m all for the weekend advertisements. You’ve done a great service with IHB and deserve some of its rewards. I always intuitively knew prices were high, but through your site I now have to vocabulary to describe why its too high. And the insight that goes with it too.
I would recommend to follow some advertising ground rules though (and everyone here should contribute.) Otherwise, soon you’ll find yourself chasing some advertising dollar kool-aid.
1. Clearly mark that this is advertisement.
2. Continue with your deep analysis on why this would make a good rental property. I learned a lot through your “rent vs buy” analysis. Now I would like to see details on why this is a good investment.
3. The day you push a POS place that even a poor college kid wouldn’t live in, regardless of how profitable the investment may be, you’ve jump the shark. Don’t jump the shark.
“3. The day you push a POS place that even a poor college kid wouldn’t live in, regardless of how profitable the investment may be, you’ve jump the shark. Don’t jump the shark.”
Unfortunately, this is the very type of property trading at or below rental parity at the moment in most markets.
IR,
I use to live in a city known as Gun Point. And a good college friend of mine live in a place he called “crackhouse” Poor college kids don’t have the same standards as of many of your readers. But if the places profiled can’t pass the “poor college kid (with poor parents) wouldn’t live here” test, then there’s some problems.
In Irvine the bad area is known as “Gunne Pointe” and by HOA rules all guns must be stainless.
LOL. 😆
IR, the plan sounds like a good idea to me, assuming you won’t have trade in your objectivity for profits when analyzing these properties. Irvine is not the only place in O.C. I’m considering buying, so it’ll be good to get your analysis on other areas as well. And the daily similar Irvine properties can get a little monotonous, so it’ll be good to have these non-Irvine properties to spice things up.
I think it is a great idea, if done with moderation (as in only on the weekends). It is much easier and way too tempting to mock overpriced mediocrity, then to identify and analyse something that is worth the money. And if restricted to Irvine, there just isn’t any of that to find for now. I would like to see such posts.
Go for it – aside from the fact that I totally support the IHB group getting some money – I think I would enjoy reading information on some housing outside of Irvine. Personally I would love to see this extended to other areas of the country. I feel like we are getting to the point where some areas of the country have started to find a bottom – while Irvine is still in la la land a bit. It would be interesting to get a fuller perspective on things as we head in to the next few years!
I think your idea is a win-win. There may actually be people on this site who would consider properties outside of Irvine if the location was decent and the price was right. This benefits the readers and the Realtor.
I think receiving money from a realtor to finance the work on this site is officially known as “coming full circle”.
It is honorable to seek the concurrence of your long time members before accepting this offer. Combined with the fact that the sponsorship will be clearly revealed will make this palatable to most. After all, we can’t wait forever for Irvine properties to actually reach rental parity or a reasonable income multiple.
If there are IE properties that investors should consider fine, but I think most people on this blog would never live there anyway. What we are anxiously awaiting is an Irvine, Laguna Niguel, CDM, HB or even Lake Forest property that is at parity.
“a realtor that would like us to profile properties outside of Irvine and provide our unbiased opinion of the investment potential.”
Unbiased – LOL
You guys are sick. $275k for this thing is way overpriced. It’s only 1000 sqft! You could build it for less than $150k. Any land title that comes with it is near worthless.
Do you guys even realize what you’re saying?
For the median household in Irvine, gross income = $84000, monthly gross = $7000.
Even $1800 rent represents 26% of gross income for this median family, barely under the 28% guideline.
So, a median Irvine household (including dual earner families) deserves to rent a less than 1000 sqft 2 bedroom POS boxshack with a carport? Are you kidding me? Keep dreaming. $1800-$2000 is too much for rent of this place, even if *today’s* renters are crazy enough to pay it.
Right on zoiks!
$1750 rent, while it may be going now, is outrageous for a 25 year old attached with no garage, and it won’t last. Even two IVC students aren’t going to pay $875 plus utilities each to live here. So you get 4 students?
A small house (2bd/2ba/2g) next to me, 4 blocks from the beach in HB, is looking for tenants at $1900, and I suspect it will drop some before it gets rented.
Would you rather live 2 blocks from IVC, or 2 blocks from the beach?
What? Are they high? I know that it is up only one flight of stairs, Mr. Realtor Man. I said high, as in loaded, zonkers, zoinks, flip city.
IR,
On the Psychology of the Bubble the time line needs to be extended and some new indicators need to be added.
There will be flat periods or slight bumps upward every time a new “hope for homeowner” plan is announced. So most recently it the indicator would be Fannie and Freddie put a moratorium on foreclosures. Prior to that there would be a bump for the stimulas plan and so on.
These mini bumps would look a lot like the bull crap (i mean bull trap) that is there now.
I have always thought that the rental parity equation, without qualifiers had dubious value. For me the most important qualifier is the type of property, IE nice place you would enjoy living in for an extended period and would have some pride of ownership verses crappy apt. When it comes to crappy apts like the one I currently rent there is no way I would want to own it even at rental parity. Maybe if owning resulted in a 30 percent discount over renting otherwise forget it.
When it comes to rentals there is value in not being finacially tied to the property and having the options to simply give notice and leave with minimal hassles plus you don’t suffer the opportunity costs that result from tying up money in a down payment.
To me the rental parity equation only begins to become applicable for a property that I would like to live in for an extended period like a decent SFR. Todays property is another crappy apt that I would never consider purchasing even at rental parity.
It seems like folks underestimate the responsibilities, costs and hassles of homeownership. Plus unless you have sold a home people don’t understand what a huge, time consuming hassle that can be. In my opinion these factors need to be included in any cost verses rent equations.
“It seems like folks underestimate the responsibilities, costs and hassles of homeownership.”
Amen. Amen. And Amen.
You may be worried about selling out, but as long as it’s transparent, no one will mind. I believe fark has sponsored headlines as well.
I also like the idea of profiling other cities because not everyone who reads this blog wants to move to Irvine.
(daily lurker, enjoyed book) There is only so much Schadenfreuden(sp?) I can deal with. Applying your analytical skills to real world REOs worth buying would be beneficial to us renters who have never done more then window shop for houses. As someone who puts a premium on renting (yard work thumbs down) i’m real curious about when i should jump into the market to save money (2012, but specific houses demonstrating said rentsaving thumbs up). The same principles apply to future 330K houses worth purchase as too the crack houses currently worth leasing to people you don’t like.
As previous posters state, as long as it is clearly labeled I have no problem with you making money off giving us a fuller picture of the housing market.
IR, If one is receiving money to do rental parity analyses? Wouldn’t one be more willing to fudge the “parity” numbers?
What would be the business model/trigger for income for a weekend-featured/analyzed property (e.g., if property is sold – a percentage, number of page views, click throughs, etc)?
Inquiring minds want to know…
That is where personal integrity meets the desire for money. My attitude is simple: I will do an analysis as if I was considering buying the property and show it to the sponsor. If he likes what I write, he will pay for it. If he doesn’t he will not. I don’t need the money (and it’s not that much anyway) so I won’t fudge the figures to make it work.
IR,
As a daily lurker, you’re doing a great service to us (and saved me a ton of cash from diving into this crazy market). I think making a few bucks off your website is great, please just identify the sponsorship stuff so we know it’s an ad. Thanks again for all your insights to date!
Larry,
Of course you deserve to make some coin. I read you blog daily. After moving here in 2004 and witnessing the craziness of the housing bubble firsthand, your blog helped keep me sane.
Thanks for all of your hardwork.
Jon Alexander
As a mostly lurker, occasional commenter, I would welcome your forays into markets other than Irvine. (Not that Irvine isn’t infinitely interesting!) Go forth and be rewarded for your outstanding efforts! I’d love to see your analyis of the Orlando market.
Seriously, money changes everything. Resist the temptation. It is why Consumer Reports does not take advertizing. You cannot even allow the appearance of duplicity. I would consider your reputation to be a much more valuable thing.
It seems very unethical to take money from the seller for an unbaised analysis. Such a report would instantly lose credibility if it was revealed that the seller paid for it. Yet, I can imagine a scenario where a buyer would pay for such a report. A big “no dice” to a potential expensive hit on your reputation.
That is the dilemma I wanted to discuss today. As I said above, I will analyze the property as if I were thinking about buying it and let the chips fall where they may. You are absolutely right that the small amount I might make from a sponsored post is not worth giving up my reputation. I would rather tell the truth and make nothing than lie for a few pennies.
I can see the dilemma…imagine if it were stocks, or medicine…I think that has to be a certain distance between the payer and the analyst. I think that they also want to pay you for the publicity. And what are the liability issues?
But I like the idea of venturing outside of Irvine. You really do some good analysis. I think that you could be objective, regardless. But what goes into reputation is not always rational.
Actually, it would be helpful to us readers, too, to be able to gauge the level of craziness in Irvine. If these other properties are in Orange County, what a revelation to see what comparable houses are listing for in other OC locations. It adds another dimension to the analysis, actually.
Of course I echo what everyone else here has said about you deserving it. Most of us suspected that there was something seriously wrong with the housing market in Irvine, but you put a frame around it, explained what was happening and why, and gave us perspective on what we saw and heard on a daily basis.
“I thought Washington Mutual was supposed to be a conservative lender”
You’re kidding right? They were the biggest advocate of option arms. They owned Long Beach Financial, which wrote plenty of subprime. “Out of WaMu’s $231.1 billion loan portfolio, it’s $52.9 billion in option ARMs and another $62.5 billion in home equity loans and lines of credit” http://www.housingwire.com/2008/07/22/wamu-59-billion-provisioned-for-losses-during-q2/
IR-
Thanks again for a great post. I’m sure you know that many people all over Orange County (and SoCal) read your posts. Do you think that you would ever consider doing a week on Newport Beach, HB, or Laguna? It would be interesting to hear some perspective on the other towns adjacent to Irvine.
I concur — I’d be interested in seeing analyses of O.C. cities besides Irvine in more than just in the sponsored weekend posts.
http://www.usatoday.com/money/perfi/housing/2008-12-09-homeowners-late-mortgage_N.htm?POE=click-refer
and now we have these fantastic honest folks who have decided not to pay their mortgages because what is in it for me mantra—-LOL
I think due to the way the blog is set up, if you do take money for a sponsored housing post, it will be ok, because there will be a lot of comments below from us….analyzing it even more.
So if you are fudging any numbers, the readers will call you out anyway. So it would be bad to do it…..your site is self-policing.